Question

In: Accounting

Question 2: Consider an economy with a single bank called the National Bank. Suppose the National...

Question 2: Consider an economy with a single bank called the National Bank. Suppose the National Bank has $500 in bank capital. Then assume the National Bank receives $1000 in deposits. It keeps 10 percent as reserves and loans the rest.

a) Show a T-account for the National Bank.

b) Calculate the leverage ratio.

c) Now suppose 20 percent of the borrowers defaulted. Can you show the new T-account?

d) What is the percentage decline in bank capital? What is the percentage decline in total assets? Why is the percentage decline in bank capital is larger than the percentage decline in total assets?

Expert Solution

Ans. a) Show a T-account for the National Bank.

T-Accounts: National Bank
Liabilities	Amount	Asstes	Amout
Capital	$ 500.00	Reserve	$ 150.00
Deposit	$ 1,000.00	Loan	$ 1,350.00

	$ 1,500.00		$ 1,500.00

Ans. b) Calculate the leverage ratio.

Leverage Ratio= Total Debt / Total Capital

= 1000 / 500

= 2.00 times

Ans. c) Now suppose 20 percent of the borrowers defaulted. Can you show the new T-account?

T-Accounts: National Bank
Liabilities	Amount	Asstes	Amout
Capital	$ 230.00	Reserve	$ 150.00
Deposit	$ 1,000.00	Loan	$ 1,080.00

	$ 1,230.00		$ 1,230.00

Ans.d) What is the percentage decline in bank capital? What is the percentage decline in total assets? Why is the percentage decline in bank capital is larger than the percentage decline in total assets?

Percentage decline in bank capital= (500-230) / 500 = 54.00%

Percentage decline in total assets= (1500-1230) / 1500 = 18.00%

Percentage decline in bank capital is larger than the percentage decline in total assets, because 20 % defalut of borrower decrease capital only but no effect on deposit. As bank have to paid full amount which it's depositor deposit in bank, we can give loan default amount effect on capital only.

ekkarill92 answered 2 years ago

Consider the European Union of national governments that has a single Central Bank with the representatives...

Consider the European Union of national governments that has a single Central Bank with the representatives from all countries. Discuss briefly the effectiveness of Fiscal versus Monetary Policies.

Suppose there is only one bank in the economy, Happy Bank. The citizens in this economy...

Suppose there is only one bank in the economy, Happy Bank. The citizens in this economy have 20 million in money, and they have all deposited their money in Happy bank. a. happy bank decides on a policy of holding 100% reserves. draw a T-account for the bank. b. Now, happy bank is required to hold 5% of its existing 20 million as reserves, and to loan out the rest. Draw a T-account for the bank after this first round...

Consider an economy that is subject to unexpected IS and LM shocks. Suppose Central Bank has...

Consider an economy that is subject to unexpected IS and LM shocks. Suppose Central Bank has two policy options: it will either keep the interest rate or the nominal money supply constant. For each type of shock, deduce which policy is more successful in reducing the variation in output.

Question 2: Suppose there is a recession in the economy that is caused by a sudden...

Question 2: Suppose there is a recession in the economy that is caused by a sudden change in aggregate demand. a) Show the recession on a graph. What will happen to the price level, output and unemployment? b) Assuming no government intervention, what will happen in the long-run? c) Now suppose the government decides to intervene. What can be done? Is there a trade-off decision in this case? If there is, explain. d) Let’s assume that the recession in the...

(2.)Suppose the First National Bank of Duluth has $500.00 million in total assets with an average...

(2.)Suppose the First National Bank of Duluth has $500.00 million in total assets with an average asset duration offive years. Assume that the bank’s liabilities are comprisedof $86.75 million of demand deposits and $163.75 million inbonds with a 4.00% coupon rate (which pays annually) and a fiveyear time-to-maturity. Further assume that currentmarket interest rates are at 9.00% per annum. (a.)(2 point) Calculate the duration of the bank’s bonds.

Suppose that that there are 3 banks in the economy, call them Bank A, Bank B,...

Suppose that that there are 3 banks in the economy, call them Bank A, Bank B, and Bank C. Suppose that that all bank reserve 20% of their deposits. A consumer deposited $250 into Bank A. Bank A loaned out some money, which were all deposited into Bank B. Bank B loaned out some money, which were all deposited into Bank C. Part a (10 points) Construct the balance sheet for each bank. That is, fill out the following tables...

Suppose you are the governor of the Bank of Canada and the economy is experiencing a...

Suppose you are the governor of the Bank of Canada and the economy is experiencing a sharp rise in the inflation rate. What actions would you take in: a. open-market operations sell bonds buy bonds make advances to the chartered banks change the overnight lending rate b. the bank rate raise the rate lower the rate set the rate at the lower bound of the Bank of Canada's operating band for the overnight lending rate set the rate lower than...

Suppose that a federal election is called at a time when the economy is experiencing a...

Suppose that a federal election is called at a time when the economy is experiencing a recessionary gap and there is a budget deficit. The leader of Party A promises, if elected, to immediately balance the budget by slashing government spending. The leader of Party B promises, if elected, to stimulate the economy with a tax decrease. What would be the effect of each party’s proposed policy on each of the following. The effect of Party A's proposed policy on:...

2. The Iron Bank is the only bank in the economy; they have 200m of deposits...

2. The Iron Bank is the only bank in the economy; they have 200m of deposits and a required reserve ratio of 10%. Their assets are one-half in loans to business and one-half government bonds. a. Draw their initial T-table of Assets and Liabilities. How many assets do they have, once the money multiplier has completed? b. Next suppose the central bank purchases 2m of bonds from the Iron Bank. Show the key steps as their T-table adjusts. What is...

Question 2. Consider a simple economy with two types of workers. There are capable workers (type...

Question 2. Consider a simple economy with two types of workers. There are capable workers (type A), constituting 70% of the population, with remaining workers (type B) being of average ability. There are two types of job opportunities as well, labeled Good and Bad. In a Bad job, either type of worker produces 20 units of output. In a Good job, Type A worker produces 80 units, and the Type B worker produces 0. The economy is doing well so...